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Exercise 14-8 (Algo) Payback Period and Simple Rate of Return [LO14-1, LO14-6]

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Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $365,000, have a fifteen-year useful life, and have a total salvage value of $36,500. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues		$ 250,000
Less operating expenses:
Commissions to amusement houses	$ 80,000
Insurance	67,000
Depreciation	21,900
Maintenance	30,000	198,900
Net operating income		$ 51,100

Exercise 14-8 Part 2 (Algo)

2a. Compute the simple rate of return promised by the games.

2b. If the company requires a simple rate of return of at least 16%, will the games be purchased?